Two decades after Simon began assembling a small empire of natural foodstuffs, Hain is enjoying a bountiful season. Sales are rising 20%-plus as it fills new distribution channels and builds on its well-known Celestial Seasonings tea offerings by acquiring trendier items like The Greek Gods yogurt, Sensible Portions veggie snacks, and BluePrint raw juices.

But Hain could find it tough to sustain the growth rate that has propped up its pricey shares. If, for example, competition weighs upon hit products or Hain falls off its acquisition pace, the stock could lose its premium multiple and spill, by our estimate, roughly a third of its value. Too many servings of these health-food shares—however wholesome—can still raise your risk.

Stronger competition is definitely on the way in veggie snacks and Greek-style yogurt, categories from which Hain has been getting its organic growth—that's "organic" in the accounting sense of "not acquired." There's also some evidence of what investors might call style drift in Hain's purchases in the U.K. of a half-billion dollars' worth of sandwich and jam products that are not particularly natural. Accretive natural-food acquisitions aren't always available when you need them.

Nor is it easy to keep score of the returns on Hain's acquisitions. Simon and his colleagues invite shareholders to heed a measure they call "adjusted net income," which excludes costs like merger fees, severance, product-line "rationalization," and other items that seem to be recurring expenses in a business dedicated to the roll-up acquisition of niche organic-food companies. Incentive compensation for management has been keyed off the adjusted-earnings number, instead of the standard earnings determined by generally recognized accounting principles. Those GAAP earnings were 40% lower than the "adjusted" number in the five fiscal years through June 2012.

WHILE FREELY CONCEDING THE CHALLENGES, Simon contends that natural foods are only in their salad days. "We are in the early stages of health and wellness," he says. Teen vegetarians will grow into the next generation of parents who choose baby foods and kids' snacks. One measure of future opportunities: Although California voters only narrowly defeated a proposition to require labeling of genetically modified ingredients, it's possible that other states will embrace GMO-labeling. Hain is already prepared with labels bragging of its GMO-free products. "I've juiced for three days," says Simon, 54, recalling a juice-fast cleansing. "The biggest prevention and biggest cure is what you eat."

After working at Slim-Fast Foods and Häagen-Dazs, Simon found the seed for his ambitions in 1993 when he took over a kosher-food business called Kineret. The next year, he bought Hain Pure Foods from Pet Inc. Many acquisitions followed: Terra Chips snacks in 1998, Earth's Best Organic baby food in 1999, and Celestial Seasonings herbal teas in 2000.

Under the name Hain Celestial Group, Simon's company did more than a dozen transactions over the ensuing decade—financed with modest levels of borrowing, rather than dilutive stock offerings. Simon and his chief financial officer, Ira Lamel, are proud that they avoided the balance-sheet heroics that brought grief to other acquisitive food companies, such as
Diamond FoodsDMND -1.0748702742772425%Diamond Foods Inc.U.S.: NasdaqUSD26.69
-0.29-1.0748702742772425%
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Volume (Delayed 15m)
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106342
P/E Ratio
N/AMarket Cap
847603675.499267
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(DMND). "Any investment banker that comes in to present a deal to us...his opening line is, 'You're way underleveraged.' " says Lamel. They've examined and declined billion-dollar deals.

Hain's moderate growth rate since its creation started to perk up a couple of years ago. Revenue for the fiscal year ended June 2012 was $1.4 billion, almost 25% above the prior year's, with earnings of $79 million, or $1.73 a share, 40% above the previous year's earnings per share, despite a 33-cents-a-share loss from now discontinued operations. Including the just-acquired British jams, revenue for the June 2013 year could approach $1.8 billion, with Hain projecting net around $2.40 (counting the new U.K. spreads). These recent years' strong performance sent the stock on its post-2010 tear.

New outlets led to a nice jump in sales for Hain products like Terra Chips—made from the likes of taro, yucca, and sweet potato—and Garden of Eatin' tortilla chips. Simon aspires to expand Hain's distribution roster, from about a third of all food retailers (as measured by industry sales volume) to half.

But after the initial stocking of these mass outlets, Hain will maintain its revenue momentum only if consumers like the stuff enough to drive same-store sales.

To be sure, Hain's recent sales strength hasn't all been from channel fill. Hain broadens distribution of its acquired products, but also comes up with new flavors and packaging. Overall sales of Sensible Portions products and The Greek Gods yogurt have more than doubled since Hain bought them two years ago. But looming ahead of these products is big competition.

Private-label veggie straws have now appeared at Whole Foods and even Kmart. As Barron's reported last month, industry production of Greek-style yogurt will expand enormously in the next few years ("A High-Stakes Food Fight," Oct. 29). Yoplait vendor General Mills is becoming an aggressive late entrant with Greek-style products.

Backed by influential politicians like Senator Chuck Schumer (D-N.Y.), New York State is helping to add yogurt-factory capacity at Chobani, Fage, and even PepsiCo, which is building a $206 million yogurt plant in a joint venture. And Danone is adding production.

In their September-quarter conference call, Hain executives confirmed that yogurt rivals were engaging in "price dealing" or, more plainly, price-cutting. This will likely become more intense as additional production capacity comes online.

Simon acknowledges that competition will increase in Hain's categories. "What keeps me up at night?" he asks. "To ensure that we keep ahead of the competition."

Hain is feeling the heat in sales of its Soy Dream and West Soy beverages, says Simon. The rival product Silk has fared so well that Dean Foods did an initial public offering of 14% of its WhiteWave Foods unit in October, with plans to distribute its remaining stake to Dean shareholders.

Other disappointments for Hain were sandwich and prepared-meal businesses acquired last year in the U.K. and since disposed of as discontinued operations. Fortunately, a single product's underperformance can't sink Hain: Simon notes that no one brand, or customer, represents more than 19% of its sales. Even so, given Hain's reliance on acquisitions for growth, an ill-starred deal makes it harder to keep up the pace.

EARNINGS GROWTH IS HARD to pinpoint in an acquisitive company. A good yardstick, suggests CFO Lamel, might be free cash flow—a measure of cash flow from operations, less capital spending. That number has grown nicely in Hain's past five years, from just 11 cents a share in the June 2008 year, to $2.21 in the June 2012 year. But if investors care about all the capital invested in Hain's acquired businesses—including equity, debt, and things like deferred tax liabilities—even those free-cash-flow numbers don't add up to an impressive return on invested capital. Over the same five-year stretch, Hain's free cash flow ROIC averaged a modest 4%. That's better than a Treasury note's return, but well below that of a comparable–and cheaper – food stock like WhiteWave with its 6% ROIC.

Simon and his team have done an admirable job of consolidating products whose ingredients are more healthful than conventional fare. If Hain can't maintain true organic profit growth, however, its shares could settle to a more conventional earnings multiple below 20. That would cut the price by about a third and annoy a tough financial-health-conscious customer named Icahn Associates, which owns about 16% of Hain's shares.